Wednesday’s trade was volatile. SP’s moved almost 20 points lower and almost 10 points back higher by the end of the session, MBS hit new multi-week highs only to end the day near yesterday’s lows, and 10yr Treasuries rallied 6 bps after a weaker open, ultimately retreating to the middle of yesterday’s range. Taken together, these movements give the sense of a “risk-off” morning giving way to a more convincing “risk-on” afternoon.
At the very least it felt like we were seeing some sort of “second thoughts” about heading into two big days of data and events at the best levels in weeks. Since bond markets turned a corner at the weakest end of their range, yesterday was among the most balanced in terms of actions being met with equal and opposite reactions. There was good push and pull, although the push for lower yields unfortunately was better-represented earlier in the day, leaving sellers in control into the afternoon. Beyond that, volume was low overall. C’est la vie.
Apart from the damage to rate sheets (MBS Live alerted members at 1:10pm and again at 3:41pm), we’re not at all upset to see some pull back before Thursday’s events. Reason being: not only did MBS markets chew through another huge day of new origination volume (read: locks), but if bond markets didn’t pull back after reaching the better levels of the day, it would seem out-of-place–almost “too bullish” given the context of the range and the recent rally. In other words, bond markets have improved steadily and directionally, right to the beginning of all the drama two weeks ago.
Specific to MBS is the fact that the upper and lower pivot points have been so clearly delineated. It’s almost as if there was nothing for Fannie 3.5’s to do but bump their heads against the 102-30 ceiling. Seeing support kick in firmly as prices approached 102-18 also seems logical given recent pivot behavior, but more importantly, feels like one of the better-case scenarios as it helps edify a pivot above a previous, lower range of prices.
Economic Events Today
0830 AM – GDP (FINAL 4TH QUARTER)
Forecast: +3.0 / Previous: +3.0
– DEFLATOR (+0.9 vs +0.9)
– FINAL SALES (+1.1 vs +1.1)
– PCE PRICE INDEX (+1.3 vs +1.3)
– CORE PCE PRICES (+1.3 vs +1.2)
0830 AM – CORPORATE PROFITS
Forecast: na vs. Previous: +2.7
0100 PM – 7 YR NOTE AUCTION
0830 AM – INITIAL JOBLESS CLAIMS
Forecast: 350k vs. Previous: 348k
– CONTINUING CLAIMS ( 3.35 mln vs 3.352 mln)
In addition, we’ll get Fed-Speak from Lockhart (voter) at 12:15pm and Bernanke at 12:45pm. Plosser (non-voter) speaks at 1:00pm–the same time as the 7yr note auction–and would have to say something ridiculous and/or amazing to have much of an impact after that which proceeds and coincides with him. There’s even Fed-Speak from Lacker (voter) in the evening but at 6:45pm, this is effectively tomorrow’s news if it’s newsworthy.